Answer to Question #50809 in Macroeconomics for Lucy Bonfiglio

6) Which of the following fiscal policy changes would have a larger overall negative impact on AD and RGDP?

Explain your answer in a paragraph or two with credible logics and analysis.

A) A program of tax hike, distributed uniformly across the households earning over $300K annually filing tax returns, amounting to $85 billion in total tax hikes.

B) An $85 billion sequester (called automatic federal government spending cut) that went into effect on March 1, 2013. This was an across-the-board spending cut in federal government’s various existing programs and services, including maintenance of major infrastructures and aviation traffic control systems.

Expert's answer

2015-02-19T10:36:30-0500

A) A program of tax hike, distributed uniformly across the households earning over $300K annually filing tax returns, amounting to $85 billion in total tax hikes will have a negative impact on the aggregate demand, especially concerning the households earning over $300K annually. But the government can compensate this loss by increase of the government spending, as now it has additional $85 billion for it.

B) An $85 billion across-the-board spending cut in federal government&rsquo;s various existing programs and services, including&nbsp;maintenance of major infrastructures and aviation traffic control systems will have a larger overall negative impact on AD and RGDP, as the decrease in government spending for such purposes will decrease bots&nbsp;consumption and investment, which will have higher negative impact especially in the long-run.

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